Throw cash in a 401(k)? 1 in 4 Americans have cut back on retirement savings

As an increasing percentage of Americans report they are having trouble making ends meet, many are cutting their retirement savings to ease their financial burden.

According to the 7th annual Personal Finance (P-Fin) Index, 1 in 4 American workers of all ages have cut their retirement savings in the wake of soaring inflation, which hit a 40-year high last year. According to the study jointly conducted by TIAA Institute and the Global Financial Literacy Excellence Center at George Washington University School of Business, 12% said they have stopped saving completely,

The cuts in retirement savings mirror a larger financial challenge, with 30% of Americans finding it difficult to make ends meet last year, up from 24% in 2021. In addition, 26% of Americans report being debt-constrained, up from 20% the year prior, and 39% lack nonretirement savings sufficient to cover one month of living expenses, up from 32% a year ago, indicating that many may have dipped into savings to deal with the increased cost of living, according to the study.

These financial pressures are taking a mental toll on Americans, with 20% of adults saying they typically spend 10 or more hours per week thinking about and dealing with issues and problems related to personal finances, up from 16% the year prior.

“This steep of a drop – on top of a crisis where 40% of Americans already don’t have enough saved for retirement – means many families will have to work even harder to achieve a secure retirement,” said Surya Kolluri, head of the TIAA Institute. “There are no simple solutions to this challenge, but we need to take a holistic approach because health and wealth are two sides of the same coin. It’s just as important to know about someone’s medical condition as it is to know about the health of their retirement savings accounts, and employers need to engage workers on both fronts.”

Related: Inflation pain: 44% of Americans are living paycheck to paycheck

Hispanic Americans have been impacted the most, with twice as many (24%) having stopped saving entirely and 40% saying they are saving less. Approximately 40% of Black Americans, Hispanics, and Gen Z typically find it difficult to make ends meet, and about 50% of each group lacks enough nonretirement savings to cover one month of living expenses. Roughly one-third of Black, Hispanic, Gen X and Gen Y Americans are debt constrained.

Meanwhile, financial literacy remains a challenge across the board. On average, U.S. adults correctly answered only 48% of the 28 index questions in 2023. Functional knowledge is consistently lowest in the realm of comprehending risk, the study found, while borrowing and debt management has consistently been the area of greatest financial literacy year after year.

Financial literacy is particularly low among Gen Z followed by Gen Y. In addition, financial literacy among women consistently tends to lag that of men, with men correctly answering about 25% more questions than women.

Not surprisingly, financial literacy proves to be an important factor in financial security. The survey found those with a very low level of financial literacy are twice as likely as those with a very high level of financial literacy to have decreased the amount they save for retirement and more than four times as likely to have stopped saving for retirement completely.

The P-Fin Index is an annual barometer of financial literacy based on a 28-question survey. U.S. adults correctly answered about one-half of the questions, which has been the norm since the project began, but the share of adults who cannot correctly answer even seven of the questions has increased. Today, one in four people cannot correctly answer more than a quarter of the questions.

There are about 20 states that require students to take financial literacy classes, and that number has been growing, said Kolluri. More employers should also consider taking steps toward empowering employees. Help them learn more about their financial wellness before they reach the age of retirement. Just like companies offer medical benefits, financial wellness benefits should also be a given.

“Employers should communicate retirement plan benefits early and often and offer them the support of a financial advisor,” said Kolluri. “Through financial advisors, plan sponsors can help employees tailor their financial plans to help savers achieve their short- and long-term goals.” Employers can also help by shifting the conversation from discussing ‘What magic number does my nest egg need to hit for me to retire?’ to ‘How should you plan for savings that will last the rest of your life?’ said Kolluri.

Researchers say the biggest financial threat for retirees is that they will outlive their money, said Kolluri. “Employers should consider embedding fixed and variable annuities into their retirement plans that can provide a monthly, pension-like ‘paycheck’ for life in retirement, making income the new outcome for retirement planning.”

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.